Geometric tomography
Public capital refers to the aggregate body of government-owned assets that are used as the means for private productivity.[1] Such assets span a wide range including: large components such as highways, airports, roads, transit systems, and railways; local, municipal components such as public education, public hospitals, police and fire protection, prisons, and courts; and critical components including water and sewer systems, public electric and gas utilities, and telecommunications.[2] Often, public capital is defined as government outlay, in terms of money, and as physical stock, in terms of infrastructure.
One of the most classic macroeconomic inquiries is the effect of public capital investment on economic growth. While many analysts debate the magnitude, evidence has shown a statistically significant positive relationship between infrastructure investment and economic performance.[1] Federal Reserve Economist David Alan Aschauer asserted an increase of the public capital stock by 1% would result in an increase of the total factor productivity by 0.4%.[3] Aschauer argues that the golden age of the 1950s and 1960s were partly due to the post-WWII substantial investment in core infrastructure (highways, mass transit, airports, water systems, electric/gas facilities). Conversely, the drop of U.S. productivity growth in the 1970s and 1980s was in response to the decrease of continual public capital investment and not the decline of technological innovation.
Given this relationship of public capital and productivity, public capital becomes a third input in the standard, neoclassical production function:
where:
- Yt represents real aggregate output of goods and services of the private sector
- At represents productivity factor or Hicks-Neutral technical change
- Nt represents aggregate employment of labor services
- Kt represents aggregate stock of nonresidential capital
- Gt represents flow of public capital stock (assuming services of public capital are proportional to public capital) [4]
In this form, public capital has a direct influence on productivity as a third variable. Additionally, public capital has an indirect influence on multifactor productivity as it affects the other two inputs of labor and private capital.
- ↑ 1.0 1.1 Aschauer, D. A. (1990). Why is infrastructure important? Conference Series [Proceedings]. Federal Reserve Bank of Boston. Pp. 21-68.
- ↑ Tatam, J. A. (1993). The Spurious Effect of Public Capital Formation on Private Sector Productivity. Policy Studies Journal, Vol. 21.
- ↑ Haan, J., Romp, W., and Sturum, J.E. (2007). Public Capital and Economic Growth. World Bank, Preliminary Paper.
- ↑ Aschauer, D. A. (1989). Is Public Expenditure Productive? Journal of Monetary Economics, Vol. 23. Pp. 177-200.